The weather picture remains a bit unclear (but still biased to the downside for prices) and as such we have seen Nat Gas futures prices discount most of what was a very cold week along the high demand heating fuel area of the northeast. There will be a warm-up this coming week along major portions of the east coast with temperatures hitting the 60's (F) in the New York area. The good news for the bulls is the warming trend will only last a few days or so before the temperatures return to more winter like levels. However, the latest NOAA six to ten day and eight to fourteen day forecasts are mixed and less supportive than the forecasts that were issued late last week.
The short term or six to ten day forecast is still projecting below normal temperatures over the eastern half of the US for the period February 1st to 5th with the western half of the US expecting mostly above normal temperatures. The supportive weather changes quickly in the eight to fourteen day forecast which is now showing a large portion of the US expecting above normal temperatures for the Feb 3rd to the 9th with only a small portion of the New England area expecting below normal temperatures. Thus the first third of February will now likely experience normal heating demand at best... possibly below normal. With only 2/3 of the month then left and with March projected to experience above normal temperatures across most of the US it does not seem likely any significant rally is going to emerge in the Nat Gas futures market anytime soon.
From a technical perspective the conclusions are very much in sync with what the current weather/fundamentals are also suggesting. At the moment it looks like the Feb Nymex Nat Gas futures contract will expire on Tuesday in a contango for the second year in a row... not very representative of a normal to colder than normal winter. In addition both the expiring Feb contract and the soon to be spot March contract are both trading below the $3.50/mmbtu resistance level and in the $3.20 to $3.50/mmbtu trading range that has been in play since December 10th with the exception of three sessions last week.
Obviously we can categorized last week's move above the $3.50/mmbtu resistance level as a false break-out for the moment. From a purely technical perspective the failure to stay above the resistance level suggests further moves to the downside in the short to medium term. It will have to take a solid move above the $3.50/mmbtu level for sustained period of time to suggest a further move to the upside.
Similarly from the fundamental side of the equation the weather is going to have to quickly get back to colder than normal... at least over the eastern half of the US after this week's round of warm weather and stay colder than normal for the rest of February to result in a solid move to the upside. The short term direction of the Nat Gas futures market will remain mostly driven by the short term weather and forecasts for the rest of the winter heating season. Right now they both seem biased to the downside for prices.
This week the EIA will release its inventory on its normal schedule and time... Thursday January 30th at 10:30 AM. This week I am projecting an average withdrawal of 200 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 149 BCF and the normal five year net withdrawal for the same week of 178 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year and versus the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 208 BCF. The surplus versus the five year average for the same week will come in around 298 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a range of 180 BCF to about a 210 BCF net withdrawal with the consensus still forming.
The oil complex is re-linking itself more closely to the slowly improving global economy and by surrogate to the global equity markets. As such the oil complex will now be as susceptible to a round of profit taking selling as the global equity markets hits multi year highs in several bourses around the world. The last several weeks of global macroeconomic data along with corporate earnings have been mostly positive for the future growth path of the global economy and thus for growth in oil consumption. However, the data releases have been light. That said things will start to change this week as the pace of macroeconomic data releases increase coupled with more market moving data and information hitting the media airwaves.
Several important and market moving corporate earnings releases will hit the media airwaves along with the always important and market moving monthly US nonfarm payroll number and headline unemployment rate. In between the aforementioned potential market moving events will be the January US Federal Reserve FOMC meeting and their policy statement release on Wednesday. In fact the US economic calendar is very full with potential market moving data being released just about every day this week. The week starts off with durable goods and housing data on Monday and consumer confidence on Tuesday. On Wednesday not only does the FOMC meeting outcome get announced early afternoon but the monthly employment data starts to hit the market with the release of the ADP private sector jobs report followed by fourth quarter US GDP data. Thursday more jobs data and the Chicago PMI Index. The week concludes with the main event the monthly nonfarm payroll number which is expected to increase marginally to 180,000 new jobs versus last month's 155,000 jobs. the headline unemployment rate is expected to drop by 0.1% to 7.7% versus last month's 7.8% rate.
The US employment data could be very interesting as the US Fed has placed more direct links to its policy and the rate of recovery (or lack thereof) of the US employment situation. Also with the equity market and many other risk asset markets approaching overbought conditions this data point could be a catalyst for a market correction. In fact we could see a market correction whether the data is good or bad. If any combination of the nonfarm payroll number underperforming versus the expectations (and last month) and/or a big increase in the headline unemployment rate would likely be interpreted as a sign that the US economic recovery could be stalling and thus result in a round of equity selling.
On the other hand if the data comes in better than expected the market will likely interpret it as a sign that the US economic recovery is growing at a faster than expected pace and thus a signal to the US Central Bank that they may have to begin to think about changing their very accommodating monetary policy including the massive amount of quantitative easing that is now in play including raising short term interest rates. We could get a hint of all of this on Wednesday before the employment data is released based on the announcement from the FOMC meeting.
In between all of the macroeconomic data will be the weekly oil inventory snapshots on Tuesday and Wednesday. However unless there is a major deviation from the expectations this week I do not think the inventory data will have a major impact on the short term direction of oil prices as the market seems to be focusing more of its attention on the forward fundamentals and have been somewhat discounting the bearish nearby fundamentals.
So yes this week there will be lots of data signals that market participants will be analyzing to determine if the current equity and risk asset short term bull markets need a rest or whether they are worthy of continuing their march to the upside mostly unabated. I suggest a lot of caution in trading this week as volatility should be above normal with the possibility of sudden price reversals at just about any time and on any day this week. A good week to protect upside market profits aggressively.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather forecasts. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish at the moment.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.
Markets ended the week mixed as shown in the following table.
NOTE: Due to my schedule on Monday I am publishing Monday's newsletter on Sunday morning.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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